A Grounded Home-buying Approach Amid Stratospheric Prices

In a lot of neighborhoods in America, housing has become laughably expensive. But if high prices haven't deterred you from staking a claim on a little piece of the country, they at least put you on your guard. High prices make buying a home more risky, which means you've GOT to make the right moves. Here are some sound ideas for navigating a squirrelly market:

Think big!
To help buyers overcome the enormous sticker prices, lenders have been offering all kinds of creative financing. Interest-only loans or adjustable-rate mortgages are very risky. But really, the more you are going to spend on a home, the more conservative you should be. Probably the biggest determiner of whether a homebuyer keeps a home after buying it is the size of the down payment. Aim for a down payment of 20% or more. Not only will it make the mortgage payment more reasonable, but you can avoid paying Private Mortgage Insurance (PMI), which is essentially insurance on your loan required by a lender … insurance that the homeowner pays and the bank benefits from.

Get real!
Just because everybody else seems to be doing it, you can't rewrite the rules of finance and spend 75% of your income on housing. The rule of thumb is that housing should be less than one third of your total budget. If you're going to break that rule, you're taking on risk. So, the answer is to eliminate some risk else where in your finances. Pay off all your other debt. Pay off your car. Lenders are more than happy to give you more loan than you might be able to handle. Before you take on a steep mortgage, be honest with yourself and figure out how you're going to pay the payment each month.

Don't go there
When home shoppers see high home prices, one of the first concessions they make is location. For instance, they may work in the city and want to live in the city, but home prices are so high, they look in the suburbs. Be cautious about living somewhere you might not want to in exchange for the size of house you want. A punishing commute can eat up so much time that you can't enjoy your home and with transportation prices going up, it can eat up a lot of the savings on the purchase of your home.